Trump Is Signaling a Trade War, but It’s Not as Disastrous as You May Think

Trump Is Signaling a Trade War, but It’s Not as Disastrous as You May Think

The Trump trade agenda is remarkably consistent—and will happen quickly.

January 5, 2017

President-elect Donald Trump speaking at a rally in Manheim, Pennsylvania, during the campaign (AP Photo / John Locher)

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For someone whose policy ideas coincide mostly with whatever he’s seen on Fox News that day, Donald Trump has been remarkably consistent on the issue of trade, endorsing a protectionist viewpoint since the 1980s. His rejection of President Obama’s Trans-Pacific Partnership and call to rewrite “disastrous” trade deals arguably helped swing the election in key Midwest states.1

In pushing this agenda, Trump leaned against a durable consensus in the center of both parties for expanded trade and globalization. And the thing about a consensus is that it’s usually presented as self-evidently correct, with minimal proof. Now that Trump is poised to shatter that consensus, we should look critically not only at what he wants to do, but at the counter-arguments from those consensus-holders.2

Trump’s policy decisions should roll out quickly. He named Robert Lighthizer as nominee for US trade representative on Tuesday, an establishment choice (a former deputy trade rep under Reagan) but one with views on trade that mirror Trump’s. In 2008 Lighthizer penned an op-ed in The New York Times attempting to position conservatives as the protectionist party (which is true if you’re talking about the 1930s, but not so much in between then and today). Though the trade rep’s position is likely to be weakened in the Trump administration, Lighthizer will work well with Peter Navarro, Trump’s trade czar, who has endorsed similarly aggressive policies against China and other mercantilist nations that have been locations for outsourcing of American manufacturing. (Commerce secretary nominee Wilbur Ross will also have an outsized role in trade policy.)3

What does that mean in practice? Trump has vowed to pull out of the TPP on day one, preferring bilateral deals with individual nations. He has promised to file grievances at the World Trade Organization against illegal practices like the dumping of cheap foreign-made steel. And his administration has flirted with a 5 or 10 percent tariff on all imports, as a means to level the playing field for domestically produced products.4

But what would be the practical effect? Hard-core free traders paint a picture of cataclysm. Tariffs will launch trade wars, increase prices, and destroy the economy. This is all hard-wired into the pro-globalization worldview. Thomas Friedman once famously admitted that he wrote a column supporting a free-trade agreement with Central America without knowing a thing about it: “I just knew two words: free trade,” he told an audience. Presumably the opposite is true for Friedman: He sees one word, “tariff,” and immediately screams in horror.6

Oddly, many of those same proponents of free trade favor a policy that looks very much like a tariff. The Republican corporate-tax revamp includes something called a border-adjustment tax, which would impose a 20 percent tax on imports while eliminating a tax on exports. Like with tariffs, the goal appears to be to encourage domestic production. In fact, the tax would be much higher than the 5-10 percent tariff being floated. (It also might be illegal under the current global trade regime.)7

Supporters of border adjustment, particularly economists, argue that it will end up trade neutral, because the exchange rate will fluctuate in response to the tax. In other words, though the tax would make American-made goods more attractive, the value of the dollar would increase, leveling that out.8

Few of these economists seem to carry over the same analysis to the effects of a tariff. I don’t understand why. There’s no reason to doubt the fact that, if Trump imposed an across-the-board tariff, the dollar would strengthen, thus nullifying the desired effect. Indeed, before Trump has even taken office, the dollar has risen to a 14-year high, in anticipation of a more protectionist stance. Incidentally, for all the one-off announcements by Trump (however factually challenged) about hundreds of jobs he has allegedly rescued here or there, this one development—the rise in the dollar—has likely caused the loss of hundreds of thousands of manufacturing jobs, under standard economic theory.9

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Looked at this way, higher tariffs wouldn’t cause a recession (as Paul Krugman has acknowledged), but would be somewhat pointless, with currency exchanges shifting to account for any changes. Trade wars might temporarily reduce efficiency, as domestic supply chains would have to be rebuilt, but they’re unlikely to radically alter the balance of trade on their own.10

There are other variables here. Importers and exporters who have lived in a world of floating exchange rates for decades may be fairly nimble in adjusting to them. On the downside, Krugman explains that raising tariffs could inhibit capital flows, meaning that investors will place less money into US markets. You can see how that might reduce economic growth. But Jeff Spross points out that America currently has a problem with too much foreign money flowing in; reducing the flow could arguably make the economy more stable. Trump could also seek to prevent unlawful currency manipulation (not necessarily from China, but from other Asian nations) that artificially disadvantages US manufacturing.11

The real unknown here is what Trump would do with all that tariff revenue. The border adjustment tax at 20 percent is assumed to bring in $1 trillion over the 10-year budget window. So a tariff of even one-quarter or one-half that size would draw significant funds. What’s the plan for it? Would it get plowed into job-creating investments? Tax cuts for the wealthy? That’s a significant variable as well.12

We do know that the same pundits who confidently predicted that globalization would be a win-win policy for America repeatedly got it wrong. Those on the losing side saw their jobs shipped out and factories closed down, and weren’t given the kind of assistance needed to offset the disruption. So it’s worth being a little skeptical of the warnings coming from the same corners now.13

I don’t have a ton of faith in the Trump team to necessarily make their trade agenda work (especially as corporate interests will seek to co-opt the redesigned policies in ways even friendlier to their bottom line). And I think there are smarter ways to balance our trade deficit than a tariff strategy which will just run up against currency exchange rates. But the hysteria accompanying these tariffs (which wasn’t at all present when President Obama imposed his own tariffs on Chinese tires and steel) seems far beyond what little we can assume about the actual results of such a strategy.14

David DayenDavid Dayen is the author of Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, which won the Studs and Ida Terkel Prize.